Green Away 1991

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Fiscal dependence on trade

taxes and trade policy
reform
a b
David Greenaway & Chris Milner
a
University of Nottingham
b
Loughborough University
Published online: 23 Nov 2007.
To cite this article: David Greenaway & Chris Milner (1991) Fiscal dependence
on trade taxes and trade policy reform, The Journal of Development Studies,
27:3, 95-132, DOI: 10.1080/00220389108422205
To link to this article: http://dx.doi.org/10.1080/00220389108422205
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Fiscal Dependence on Trade Taxes and Trade
Policy Reform
by David Greenaway and Chris Milner*
The article focuses on fiscal implications of Structural Adjustment

Loans (SALs), from an a priori standpoint and by reference to the
experience of five countries. Three of these countries have had
revenue enhancement after trade policy reforms, and the other two
cases experienced revenue depletion. The central point which

emerges from the study is that it is not clear that trade liberalisation
leads to fiscal enhancement or fiscal depletion. Both a priori
theorising and country analyses demonstrate that a range of out-
comes is possible depending upon initial conditions and the com-
ponents of any reform package.
I. INTRODUCTION
Some measure of trade policy reform has featured in more than 70 per cerit
of all Structural Adjustment Lending (SAL) packages. Its principal
purpose is to move domestic prices towards world prices and reduce the
distortions inherent in the protective structures of many LDCs. The
overriding objectives are therefore directed at the protective impact of
trade inverventions and their allocational effects. Trade interventions in
LDCs are however frequently directed at multiple objectives. As well as
having a protective intent they are also used to raise revenue.
It is well known that there is a trade-off between the protective and
revenue motives. This being so, we should not be surprised to find that
changes in the protective structure have an impact on revenue collections.
Given the importance of revenue from trade taxes in many developing
countries, the willingness to undertake trade policy reform is likely to be
substantially influenced by the transitional impact1 of the reforms on
trade tax revenue. This paper addresses the following questions. What
characteristics make countries more or less vulnerable to declines in trade
tax revenue in the face of trade reform? What type of trade policy reforms
are more likely to be 'revenue-depleting' and which 'revenue-enhancing?'
Does the available evidence give any guidance for the design of 'revenue-
neutral' trade reform programmes? The central point which emerges
from the study is that it is not clear on a priori or empirical grounds that
* University of Nottingham and Loughborough University respectively. The authors wish to

acknowledge helpful comments from David Evans, John Whalley and from an anonymous
referee on an earlier draft of the study. The usual disclaimer applies.
The Journal of Development Studies, Vol. 27, No. 3, pp.95-132.

Published by Frank Cass, London
96 DEVELOPING COUNTRIES AND THE INTERNATIONAL ECONOMY
trade liberalisation will unambiguously lead to fiscal enhancement or

fiscal depletion.
The remainder of this paper is organised as follows. Section II examines
in detail ways in which specific measures of trade policy reform and
country characteristics may affect government revenue in developing
countries. This analytical framework is extended in section III to identify
country- and reform-characteristics that can be expected to influence
the vulnerability to, and direction of, trade-reform-induced revenue
changes. Section IV examines the evidence on the impact of trade reform
on government revenue, using cross-sectional and case study material.
Finally section V provides some discussion of the implications of the
analysis for design and sequencing of trade policy reforms.
II. THE ANALYTICAL LINKS BETWEEN TRADE POLICY REFORM AND

GOVERNMENT REVENUE
Trade policy reforms in the SAL programme have involved some mixture
of the following: tariff liberalisation; simplification and consolidation of
import taxation; reduced tariff exemptions; liberalisation of quantitative
import restrictions; and attempts to reduce impediments to exports. Let
us consider in turn the analytical link between government revenue and
each of these measures on a ceteris paribus basis.
Tariff Liberalisation
It is often assumed that reduction of the average tariff rate must reduce
tariff collections. For example Yagci, Kamin and Rosenbaum [1985]
argue that'... tariff reduction reduces government revenue and increases
imports, which in turn increases both the budget deficit and the balance of
payments deficit ...' [22]. This particular concern causes great anxiety on
the part of LDC governments. Indeed potential revenue loss is probably
the single most important factor in creating resistance to tariff liberalisa-
tion.2 However, it does not automatically follow that tariff reduction leads
to revenue depletion. In the case of a marginal reduction the precise
effects depend upon the initial tariff rate, and the elasticity of import
demand over the relevant range. If the initial tariff is above the revenue
maximising rate, then tariff reductions will necessarily increase tariff
collections. Moreover, liberalisation may reduce incentives to smuggling
and other illegal activities thereby improving compliance and broadening
the tax base. In addition, tariff reduction could initiate a rightward shift in
demand (as a result of positive income effects) reinforcing this tendency to
revenue enhancement. Finally, since the prohibitive tariff exceeds the
revenue maximising tariff, there is a greater likelihood of increased
revenues when tariffs have been introduced specifically for protective
purposes. However, it is also possible that tariff revenues are reduced by
liberalisation. This would follow if the initial tariff is below the maximum
revenue tariff. The net impact of general tariff liberalisation on duty
collectons depends, therefore, on the frequency of existing rates above
and below the maximum revenue rates for the specific categories of
FISCAL DEPENDENCE ON TRADE TAXES AND TRADE POLICY REFORM 97
imports, the nature of the tariff rate changes, the shares of specific
imports in total imports, and the relevant individual own and cross price
elasticities of demand and supply.
Tariff Consolidation and Simplification
Tariff reform often attempts to consolidate a range of existing import
specific-taxes into a single rate. For example, in Mauritius, as well as
customs duty there formerly existed fiscal duty, an import surcharge,
special import levy and stamp duty - all of which discriminated between
imports and import substitutes, that is, they were tariffs by a different
name [Greenaway and Milner, 1986 and 1989]. In the interests of greater
transparency these were consolidated. In principle this type of reform
should in itself be revenue-neutral. However the extent that greater

simplicity reduces the scope for duty evasion through misrecording, or
reduces administrative costs it may be revenue-enhancing.
Reductions in Tariff Exemptions
A common characteristic of LDC tariff structures is the extent of exemp-
tions. Generally these apply to international organisations, expenditures
financed by project aid and diplomatic groups. In addition, however,
many LDCs extend exemptions to parastatal enterprises and any
organisations associated with aid related projects. Moreover since
exemptions are frequently discretionary, there is a tendency for their
scope to widen through time. The granting of exemptions constitutes a
substantial source of revenue loss.3
Liberalisation of Quantitative Restrictions on Imports and Exports
The non-equivalence between tariffs and quotas is well known and well
understood, and economic theory ranks the quota as an inferior pro-
tective instrument to the tariff in most circumstances. For this reason most
SALs are conditional on quota removal - according to a recent evaluation,
57 per cent of all SALs examined [Mosley, 1987].
Import quota removal often has fiscal implications. Those SALs which
specify conditionality on this issue effectively make a distinction between
the degree of protection provided to a given activity, and the instrument of
protection used - emphasising in particular the latter. Thus reform
focuses not on the abolition of quotas per se, but on their replacement with
equivalent tariffs. So long as the equivalent tariff is not prohibitive, this
switching of instruments must enhance revenue collections, as quota rents
are transferred to the fiscal authorities; the degree of fiscal enhancement
depending upon the magnitude of the pre-existing quota rents, and the
exact tariff rate chosen/ Where QRs have been pervasive, the effect on
the tax base may be dramatic.5
Reduced Impediments to Exports
Economic theory demonstrates conclusively that protection is a relative
concept. Most SALs include conditions directed at compensating for
export disincentive effects, some 76 per cent according to Mosley [1987].
The provision of export incentives such as duty drawback, concessional

finance, preferential access to foreign exchange allocations and so on is no
more than a recognition of the fact that any import liberalisation which is
initiated is far from complete. As with quotas, however, although the
policy change may be motivated by allocational considerations, it has
revenue implications. Clearly, other things being equal, direct fiscal
incentives to exporters represent a drain on potential fiscal revenue. This
is of course a partial equilibrium inference. If the export supply schedule is
elastic over the relevant range, the provision of incentives could con-
ceivably result in a net increase in non-trade revenue collections. Similarly
if duty drawback is applied to imports that would not have occurred in
the absence of export promotion, then actual revenue losses are not
experienced.
As can be seen from Table 1, of course, it is export taxes that are in some
developing countries a major source of trade taxes. Export taxation of
traditional exports may not significantly impede the volume of these
exports. In this case export tax reductions are likely to reduce tax revenue,
but the revenue-impact of partial reductions strictly depends upon the
elasticity of export supply. Tax yield from traditional exports will be
much more sensitive to world prices. Domestic policy decisions are
however likely to be more significant in the case of non-traditional
exports. Exemption from export taxes is likely to be necessary to enable
competition in export markets and to reduce the incentive to produce for
the home market. We may anticipate therefore that, ceteris paribus, the
importance of export taxes in total tax yield will diminish as the share of
non-traditional exportables in total exports increases.
Exchange Rate Adjustment
This policy instrument is given particular prominence in arrangements
involving cross conditionality with IMF Stabilization Loans. Where
recommendations are made, they are invariably directed at reducing the
real exchange rate. On small open economy assumptions this raises the
domestic price of imports and may deplete or augment tariff revenues
depending upon elasticity of demands for importables, and elasticity
of supplies of import substitutes over the relevant range. The overall
elasticity of imports will depend upon the share of competitive imports in
total imports. The elasticity for some imports may be quite high, that is for
foodstuffs and consumer goods that compete with domestic production.
By contrast the elasticity of demand for capital goods, raw material, and
intermediate inputs for which there are no import substitutes will tend to
be low. Imports therefore are likely to be price inelastic overall in the case
of the least industrialised developing countries. Import duties will be
enhanced by devaluation in these cases (assuming that the non-competing
imports in question are not exempt from duties).
Export tax yield in domestic currency is unambiguously enhanced by
removing or reducing currency over-valuation, since even if exports are
perfectly inelastic in supply the domestic currency values of given foreign
currency earnings is increased by devaluation.6 Exchange rate adjustment
TABLE 1
TRADE TAXES AND INCOME PER CAPITA
Country TTa/GR(%) •3NPb MT d /rr(%)
Gambia 62.56C 378 n.a.

Yemen 60.51 442 85
Swaziland 59.44 903 71
Rwanda 53.52 233 54
Chad 52.43d 125 86

Sierra Leone 47.80 320 74
Sri Lanka 46.22 269 19
Mauritius 44.76 976 85
Sudan 44.60 436 76
Ethiopia 40.54d 132 74
Honduras 40.22 649 77
El Salvador 39.63 791 41
Ghana 38.28 389 36
Botswana 35.79 848 95
Zaire 35.10 194 46
Dominican Republic 34.76 1236 71
Liberia 33.71 530 97
Pakistan 33.46 327 66
Bolivia 33.42 630 57
Fiji 27.61 1856 92
Peru 26.94 1192 81
Tunisia 25.20 1210' 93
Philippines 24.58 733 79
Thailand 24.03 686 81
Paraguay 23.02 1333 64
Gabon 22.95 d 4919 83
Costa Rica 22.20 1438 66
Kenya 21.13 365 96
Cyprus 21.10 3164 100
Colombia 21.02 1329 62
Nicaragua 20.01 1010 83
India 19.15 204 84
Barbados 19.84 2800 90
Morocco 19.46 787 88
TABLE 1 (cont.)
Country TTa/GR(%) ONP'
Mexico 19.34 2016 M

Tanzania 18.31 234 77
d
Nigeria 17.38 842 99
Malawi 15.89 203 100
K.rea 15.47 1544 99
Burma 15.46 158 100
Syiia 14.43 1419 9S

Ireland 13.2? 4931 100
Turkey 11.84 1273 97
Uruguay 11.02 2640 67
Spain 8.50 5043 too
Indonesia 8.32 490 72
Zambia 7.42 614 3.1
Venezuela 7.21 3365 85
Singapore 6.89 4064 100
Canada 6.75 11017 67
Israel 5.99 5140 91
Chile 5.52 2266 81
Australia 5,43 10600 91
South Africa 5.28 2474 9?.
Greece 4.81 4031 97
Brazil 4.15 2144 86
New Zealand 3.40 7313 100
Austria 1.76 8849 100
Finland 1.70 9496 96
USA 1.54 12451 100
Sweden 1.15 13132 100
Denmark 0.95 11415 100
Norway 0.80 12835 92
tlaly 0.30 6250 100
United Kingdom 0.17 8954 94
France 0.04 10684 100
Belgium 0.02 9994 100
Germany 0.02 11398 100
Netherlands 0.01 10508 100
TABLE 1 (cont.)
Country TT a /GRW CNPb MTd/TT(%)
World 4.9B 2481 84
Industrial countries 1.61 10201 97
Non-oil developing countries 16.96 393 78

a Trade taxes as a percentage of total government revenue - average of seven-year period

1976-82; compiled from Government Finance Statistics Yearbook, IMF, 1984, pp.42-3.
b GNP per capita of mid-year population in $US 1980 market prices: average of seven-
year period 1976-82; compiled from International Financial Statistics, Supplement No. 8,
IMF, 1984.
c Data incomplete for seven-year period.
d Share of total trade tax accounted for by import taxes for annual averages 1972-77.
Computed from Government Finance Statistics Yearbook, IMF, 1979.
is most likely therefore to be revenue-enhancing in the case of countries

where there is a high dependence on traditional exports and export taxes.
More industrialised developing countries with a greater proportion of
competitive imports and of non-traditional exports are less likely, by
contrast, to experience revenue-enhancement from currency deprecia-
tion.
III. FACTORS THAT DETERMINE THE REVENUE IMPACT OF REFORM

There is such interdependence between trade policy and other fiscal
policy reforms, that it is impossible to consider trade policy reforms in
isolation. Revenue-depleting trade policy reforms in the absence of other
fiscal reforms are more likely, ceteris paribus, to result in fiscal problems
and thereby undermine the sustainability of trade policy reform. But the
extent of this treat to sustainability in a particular country depends upon
the country's current fiscal dependence on trade taxes and how it might be
expected to change, and the probability that trade policy reforms will be
revenue-depleting, rather than revenue-neutral or revenue-enhancing.
Let us consider each of these factors in turn.
A. Country Differences in Fiscal Dependence on Trade Taxes
Table 1 provides details of fiscal dependence on trade taxes for a sample of
69 developed and developing countries. In the developing countries the
trade tax share ranges from just over five per cent in Chile to 62 per cent in
Gambia. The average share for all (non-oil) developing countries is 17 per
cent. There is however a wide dispersion around the mean and the trade
tax share is substantially in excess of this in many cases. Thus, in 11 out of
the 69 countries the share exceeds 40 per cent; in 31 cases it exceeds 20 per
cent. Table 1 also disaggregates total trade taxes into import and export
taxes. For most countries import taxes predominate. Overall they account
for about 84 per cent of total trade taxes. In general, export taxes tend to
be confined to economies like Ghana, Zaire and El Salvador which are
heavily dependent on exports of primary agricultural products. This
latter consideration also influences the regional pattern of trade tax
dependence. As Table 2 shows, countries in Africa are more heavily
dependent on trade taxes, followed by Asia, Latin America, and the
Southern European middle income countries. This is in part due to the
more extensive use of export taxes, in part due to the concentration of low
income countries in Sub-Saharan Africa.

What has fashioned this pattern of heavy dependence on trade taxes
in developing countries? In considering questions of tax structure,
economists take into account the issues of efficiency, equity and adminis-
tration. On grounds of efficiency and equity it is unlikely that trade taxes
which are levied for purposes of raising revenue have any part to play
in a 'first best' tax structure. However, when income per cepita is
low (in absolute terms) questions of equity and efficiency are secondary
to questions of administrative feasibility. The 'characteristics' of low-
income-per-capita countries in many cases simply dictate dependence on
trade taxes through necessity rather than choice (see Greenaway, 1980).
The cost/yield ratio associated with trade taxes is likely to be very much
lower than the cost/yield ratio associated with domestic income taxes or
production taxes. The available evidence on collection costs is somewhat
limited. In a review of the evidence however the 1988 World Development
Report estimated the administrative costs of trade taxes at one per cent to
three per cent of revenue collected. By contrast, for value added taxes the
figure was five per cent, and for income taxes, as high as ten per cent. Thus,
although the economic costs of trade taxes generally exceed those of
income taxes and VATs, administrative costs are much lower, a crucial
consideration for low income developing countries.
Dependence on Trade Taxes and Country Characteristics: Analysis
from Recent Data
Table 2 cross-classifies the data on 101 LDCs in various ways in order to
bring out the principal economic characteristics associated with heavy
dependence on trade taxes. Panel (a) cross classifies income per head with
dependence on trade taxes, and other economic indicators. Four income
brackets are deployed, Low Income, Lower Middle Income, Upper
Middle Income and High Income Oil Exporters (using the World Bank
classification system). Column (1) confirms the inverse relationship
between income per head and dependence on trade taxes. In Low Income
countries the share of trade taxes is almost 34 per cent. It is 23 per cent in
Lower Middle Income Countries and just under ten per cent in Upper
Middle Income Countries. Finally, in the High Income Oil Exporting
Countries, the recorded share is less than four per cent. As can also be seen
the share of agriculture in GDP varies inversely with income per head,
TABLE 2
CROSS CLASSIFICATIONS OF DEPENDENCE ON TRADE TAXES AND COUNTRY
ECONOMIC CHARACTERISTICS
(») Cross Classification bv Income per Capita
Income Category TT AG CG PP UP
Low Income (39) 33.8 40.7 14.0 75.0 21.0

Lower Middle Income (34) 22.6 20.2 16.0 74.0 44.0

Upper Middle Income (24) 9.9 13.9 16.0 58.0 60.0
High Income Oil (4) 3.6 2.5 22.0 90.0 76.0
Cbl Cross Classification bv Dependence on Trade Taxes
Dependence Category TT AG CG PP UP GD
Low Dependence (25) 7.2 14.5 17.8 65.5 61.0 3,560

Medium Dependence (29) 22.4 27.6 14.8 75.1 36.2 918
High Dependence (17) 42.7 34.6 15.5 74.1 29.8 616
(ct Cross Classification bv Continent
Continent TT AG CG PP UP GD
Africa (4) 35.8 32.3 15.6 82.4 29.9 637

Asia (32) 17.7 21.8 15.8 59.8 41.3 2,636
Americas (21) 22.3 15.4 14.2 71.4 54.6 1,648
Europe (5) 12.3 14.2 14.2 30.2 51.2 2,786
(d) Cross Classification bv Degree of Trade Exposure <TE)
TT AG CG PP UP GD
Low TE (22) 28.4 34.0 13.0 72.8 33.6 782

Medium TE (42) 19.4 26.8 15.0 72.9 42.0 1,226
High TE (22) 21.6 18.9 16.9 61.0 46.6 2,087
Key
TT = Proportion of total tax revenue accounted for by trade taxes.
AG = Share of agriculture in GDP.
CG = Share of government consumption in GDP.
PP = Share of primary products in GDP.
UP = Share of total population in urban areas.
GD = GDP per capita.
Number of countries in each category are in parenthesis.
whilst the'proportion of the total population in urban areas varies directly.

Finally, it might be noted that, with the exception of the high income
oil exporters the share of central government consumption in GDP is
remarkably stable.
Panel (b) cross-classifies countries by 'tax bracket' and economic
characteristics. Dependence on trade taxes is broken down into three
brackets, 'low' refers to shares of trade taxes of less than 15 per cent;
'medium' greater than 15 per cent but less than 30 per cent; and high to
shares in excess of 30 per cent. As would be expected from panel (a), the
high dependence countries are confirmed as low income countries. They
are also countries where the share of agriculture in GDP is relatively high,
and the share of the urban population is relatively low. The converse holds
for the low dependence countries. Again the link with dependence
on primary product exports is not so strong, although there is some
suggestion of increasing dependence on exports of primary products and
dependence on trade taxes. Finally, it is again notable that the share of
central government expenditure varies little across tax brackets.
Panel (c) cross classifies the data by continent. Trade tax dependence is
heaviest in Africa, followed by Central and South America, Asia and
Europe. In Africa, income per head is lowest, the share of agriculture in
GDP is highest, the share of the population which is urbanised is lowest,
and dependence on primary products is highest. In the Southern Euro-
pean countries, the opposite is the case. In Asia and the Americas, the
characteristics fall in between. Income per head is lower in the Americas,
and dependence on primary products is greater. The share of agriculture
in GDP is however lower and the share of the urban population greater
than in Asia. Finally, the stability in the share of central government
expenditure by continent is again notable.
The last panel of Table 2 cross-classifies countries according to degree
of trade exposure. Three categories are identified: low, medium and high
depending upon whether %(X + M)/GDP is less than 15 per cent,
between 15 per cent and 30 per cent or greater than 30 per cent. CG and UP
show no obvious pattern, as with other indicators. Income per head
appears to be directly related to openness, and the share of agriculture in
GDP inversely related. The share of primary products in exports is lowest
for the most open economies, but identical in the low and medium
exposure categories. Finally, no clear pattern emerges with regard to
dependence on trade taxes, except that the most closed economies (in
terms of trade exposure) clearly exhibit the greatest dependence. This
may appear to be counter-intuitive since, ceteris paribus, we would expect
greater trade exposure to signify a broader tax base. It is however a
reflection of the fact that the low TE economies also tend to be the low
income per head economies.
These cross classifications in panels (a)-(e) identify very clearly the
country characteristics associated with heavy dependence on trade
taxes. Typically, as well as having a relatively low level of income per
capita, they will be agriculturally based, relatively heavily dependent
on primary products, and not highly urbanised. The country group
which these characteristics describe most clearly is the Sub-Saharan

African economies. These findings accord well with a priori expectations
and suggest that there is likely to be greatest sensitivity to SAL induced
trade policy reform in Sub-Saharan Africa.
Declining Dependence on Trade Taxes
For several reasons it can be expected that as per capita income grows and
industrialisation proceeds, a widening of the tax base and a shift towards a
higher order tax structure becomes possible (see Table 3). The growth of a
cash based economy, urbanisation and growing administrative expertise
result in the collection costs of other taxes falling relative to trade taxes. A
number of empirical studies have investigated this relationship. Table 4
reports the results from four such studies, Lewis [1963], Greenaway
[1980,982], and Greenaway and Sapsford [1987]. The country samples
vary from 41 to 86, and encompass various sub-periods between 1954 and
1978. In each case the share of trade taxes in total tax revenue is regressed
on income per head and an index of openness. The latter takes the relative
size of the foreign trade sector as a proxy for taxable capacity.
Notwithstanding the fact that the studies encompass a number of time
periods and a variety of country samples, when an aggregate sample of
countries is taken, a statistically significant negative relationship between
income per head and dependence on trade taxes is established. This
relationship is robust across time periods. Moreover it is also robust with
respect to proxies for 'development'. Although it is not shown in the table
disaggregation of the samples into low income, middle income and
industrialised economies has interesting results. Specifically the inverse
relationship holds and is stable for the middle income countries. It is,
however, weaker in the industrialised economies and appears to collapse
completely for the low income countries.7 This could be because income
per capita as a proxy for development is at its most unsatisfactory in the
case of low income countries, and because of the much more varied
pattern of trade policy regimes among the least developed or it could be
due to the functional form imposed by the above studies, as Gemmell
[1990] argues. What is clear however is that an inverse relationship
between fiscal dependence on trade taxes and economic development
exists, and this relationship is (statistically) especially strong in the case of
middle income countries. The least developed remain most heavily
dependent on trade taxes for fiscal resources. These are therefore the
economies which are potentially most exposed in the event of a sudden
and dramatic alteration in tariff rates and/or tariff structure.
B. Expected Changes in Trade Tax Revenue
In the light of the foregoing discussion of the relationship between trade
reform and trade tax revenue it is possible to speculate on what 'initial'
conditions (in the pre-reform environment) can be expected to result in
revenue-depletion or revenue-enhancement on a ceteris paribus basis.
TABLE 3 g
SHARE OF DIFFERENT TAXES IN TOTAL GOVERNMENT REVENUE (%) <
AROUND 1980 r
O
Country groupa (number) Taxes O

O
Income and Domestic goods International Social Security O
profit and services trade contributions §
A: Industrial countries (20) 33.3

33.3 26.0
26.0 3.7 25.0 5
B: Semi-industrial countries (15) 25.3

25.3 30.6
30.6 14.5 13.0 2
C: Middle-income countries (55) 23.7

23.7 23.
23.JJ 28.9 4.1 3
17.0 21.7
a
D: Least developed countries (14) 17.0 21.7 41.6 1.6 g
a For a list of countries included in each group see Goode [1984:6,91]. Countries have generally been assigned to groups following IMF practice. 2
Source: Goode [1984: 91]. >
i
>
w
o
§
o
TABLE 4
ECONOMETRIC STUDIES OF FISCAL DEPENDENCE ON TRADE TAXES AND
ECONOMIC DEVELOPMENT
F«riod Eq. No.* Equation
1954-60b 1 log REV - 1.76 - 0.730 log CNP -f 0.906 log TR R 2 - 0.78
(1.47) (1.41) (2.18)* N - 41
2 log REV - 0.945 - 0.907 log CNP + 0.575 log TR R2 - 0.63

(2.38)* (3.17)* (0.59) M - 18
3 log REV - 0.707 • 0.497 log CNF + 1.13 log TR R 2 - 0.72

(0.81) (3.89)# (2.04) N - 23
1966-72° 1 log REV - 4.014 • 0.538 log CNP + 0.534 log TR R 2 - 0.60
(«.343)*(-8.242)# (3.453)* N - 50
2 log REV - 3.037 • 0.295 log CNP + 0.452 log TR R 2 - 0.24

(3.022)*(-1.781) (2.478)* N - 29
3 log REV - C.421 • 0.852 log CNP + 0.518 log TR R 2 - 0.55

(3.111)*(-3.929)* (1.906) N - 21
1972-77d 1 log REV - 2.376 - 0.758 log CNF + 5.838 log TR R 2 - 0.55
(6.36)*(-9.143)* (3.10)* N - 74
2 log REV - 1.541 • 0.263 log CNF + 3.280 log TR R 2 - 0.14

(4.549)"(-1.90)« (2.161)* N - 40
3 log REV - 3.720 - 0.119 log CNF + 6.797 log TR R 2 - 0.40

(3.483)*(-4.325)* (2.026)* N - 34
1974-78* 2 log REV - 2.42 • 0.03 log CNP + 0.22 log TR R 2 - 0.09
(2.34)* (0.13) (1.16) N - 26
3 log REV - 6.77 - 0.64 log CNP + 0.21 log TR R 2 - 0.35

(5.1)» (4.23)# (1.63) N •• 42
Notes:
a For each period equation 1 refers to the aggregate sample, equation 2 refers to iow-
income' countries, equation 3 refers to 'high- and intermediate-income' countries. For
consistency, these categories are defined according to Lewis [1967].
b Based on Lewis [7967: Table 1].
c Based on Greenaway [1980: Table 2].
d Based on Greenaway [1984].
e Based on Greenaway and Sapsford [1987].
* Significant at five per cent level of confidence.
# Significance at one per cent level of confidence.
Tariff and Non-Tariff Reform, and Import Duty

Reducing the spread of tariff rates (without altering the average tariff
level) might increase or decrease import duties, depending upon the
frequency with which the adjustment is in the direction of the maximum
revenue tariff for the particular import category and upon the weight of
specific categories in total imports. There are however a priori grounds for
believing that the greater are pre-reform tariff differentials, the greater
the scope for a reduction in differentials enhancing revenue. First, the
greater the differentials, the greater the scope and incentive for duty
evasion. Second, since greater dispersion of duty rates in developing
countries is often the outcome of ad hoc crisis management and lobbying

by pressure groups, there is a greater probability that actual rates of
duty are non-optimal in revenue terms. Third, the greater spread of de
facto tariff rates is likely to be associated with pervasive use of tariff
exemptions. It is then likely that reductions of tariff differentials will be
revenue-enhancing and especially so in the case of the more inward-
oriented developing countries.
The revenue effect of reduction of the overall average rate of import
taxation is again strictly speaking indeterminate, unless we know how
the liberalisation effects individual categories of imports. The ceterisparibus
assumption itself also gives rise to complications, since the composition
of imports can be expected to alter as a result of other trade policy reforms.

If we recognise a general similarity of demand and supply elasticities
across broad categories of imports between developing countries we can
again, however, formulate a prior expectation. Given that the prohibitive
tariff is greater than the maximum revenue tariff, then one may expect
that those countries with the highest average tariff levels to be most
likely to move individual tariff rates towards the maximum revenue tariff,
and thereby enhance tariff revenue. Revenue-enhancement can be expected
in particular where competing imports are a larger share of total imports,
and where the protective motive dominates the revenue-motive. The pro-
tective motive may be expected to dominate the revenue motive, ceteris
paribus, in the case of countries pursuing more inward-oriented trade
strategies. Smaller countries or those in the early stages of industrialisa-
tion are by contrast likely to have high shares of non-competing goods
in total imports, which is not likely therefore to be taxed for protective
reasons. Tariff rates are more likely to be below the revenue-maximising
level (pre-reform), and tariff-reduction is more likely to be tariff-
depleting than in the case of more industrialised developing countries.
The orientation of a country's trade strategy and the composition of its
imports are also likely to be of significance in predicting the revenue-
impact of the reduction or removal of quantitative import restrictions.
QRs are more likely to be pervasive prior to reform in the case of highly
inward-oriented economies and where the ratio of competing to total
imports is greater, that is where import quotas and bans are a major
instrument of protection. As argued above, therefore, elimination of non-
tariff restrictions is likely to be a more significant source of revenue-
enhancement for the larger and more industrialised developing countries.
The exception to this conclusion will be in the case of some of the
poorest and most foreign-exchange constrained, developing countries
in sub-Saharan Africa for instance, where quantitative restrictions (QRs)
are pervasively used to ration scarce foreign exchange. Given that
foreign exchange auctioning is not typically employed by these countries,
potential revenue loss from QRs is likely to be greatest in relative terms
the scarcer is foreign exchange. But de facto restrictions on imports are
likely to remain if the foreign exchange constraint is not alleviated to any
significant extent by the reforms.
Export Incentives, Exchange Rate Policy and Revenue

Many of the measures to reduce anti-export bias may affect the govern-
ment budget. Tax holidays for firms located in Export Processing Zones
(EPZs) for example may reduce yields from profits tax in the short to
medium term. Alternatively the provision of improved credit facilities or
infrastructure support will have implications for the expenditure side of
the budget. The most important direct influences on trade tax yields are
likely to result from the introduction of duty drawback schemes (in
particular for non-traditional exports) and from alterations to export
taxes (for traditional exports in particular). Clearly exemption from
import taxes on inputs must be revenue-depleting, if there were pre-
viously (non-traditional) exports on which there was no duty drawback

(unless exemption stimulates strong growth of exports). Thus revenue-
depletion in this case will be greater the greater the pre-reform share of
non-traditional items in total exports, and the greater the dependence
of non-traditional exports on imported inputs. If duty-exemption on
inputs in export activities replaces duty-exemption on inputs in import-
substitution activities, then there may be no immediate revenue-depletion
if the non-traditional export sector is smaller than the import-substitution
sector.
Significant reductions in export tax rates on traditional exports are
likely to reduce the yield on export taxes. In the case of non-traditionals
where export taxes are likely to be a more significant impediment to
exporting, total removal of export taxes can only be revenue-depleting.
Partial reduction could however be revenue-enhancing; depending upon
their elasticity of supply over the relevant range and their share in total
exports.
The revenue-effects induced by exchange rate adjustment are particu-
larly problematic to predict. Export tax yield will be directly related to the
degree of currency depreciation; with the degree of depreciation required
to restore equilibrium being directly related to the extent of import
protection. But the most heavily protected economies are those where
tariff reduction is, ceteris paribus, most likely to be revenue-enhancing.
This source of revenue-enhancement may be offset therefore where tariff-
rate reductions are accompanied by currency depreciation. The factors or
country characteristics affecting the sensitivity of trade tax yields to trade
policy reform, identified in this section, are set out in Table 5.
IV. STRUCTURAL ADJUSTMENT LENDING AND FISCAL YIELD IN A

NUMBER OF DEVELOPING COUNTRIES
In an analysis of this type there are three important constraints. First,
more than 40 countries have been subject to SAL agreements which have
had trade policy components. In an ideal world one would evaluate the
detail of all 40 cases. In the context of this analysis one perforce needs to be
selective. Second, it is often forgotten that the SAL programme has only
TABLE 5
FACTORS AFFECTING SENSITIVITY OF TRADE TAX YIELD TO TRADE POLICY
REFORM: A SCHEMA
Possibility of revenue-depletion Possibility of revenue-enhancement
- of import duties, inversely related to - of import duties, directly related to

the pre-reform average level of the extent of pre-reform tariff rate
nominal tariffs differentials
- of import duties, directly related to - of import duties, directly related to

the pre-reform smallness and newness the pre-reform share of competing in
of the industrial, import-substitute total imports.
sector
- of import duties, directly related to - of import duties, directly related to

the pre-reform share of non- the pre-reform incidence of duty
traditional in total exports exemptions.
- of import duties, inversely related to - of import duties, directly related to

the extent that the foreign exchange the incidence and extent of
constraint is alleviated by the reforms quantitative import restrictions
- of export duties, directly related to - of export duties, directly related to
the extent of duty reductions on the amount of currency depreciation
traditional exports, and the following the reforms
importance of traditional in total
exports
been in operation for some ten years or so. Many of the policy reforms
introduced are intended to have medium- to long-term effects. Although
some fiscal effects are fairly immediate, it has to be acknowledged that, in
some cases, it is still 'early days' in evaluating the economic effects of SAL
lending. Moreover this particular complication is not helped by the fact
that for many of the SAL countries, other policy shocks have been
experienced in the interim. Third, and related to the above, a number of
countries have had more than one SAL with trade policy components. For
example, in 11 cases, countries have had three or more individual adjust-
ment loans which have had trade policy components.
The appraisal in this section will focus on a sub-sample of SAL
countries, and will be in two parts. First, we will evaluate the 'initial
conditions' which prevailed in 11 SAL countries, namely Mauritius,
Chile, Morocco, Jamaica, Mexico, Panama, Cote d'lvoire, Ghana,
Kenya, Tunisia and the Philippines. This sample gives a wide coverage of
country characteristics (size, geographical location and population), and
of economic characteristics (debt position, income per capita and trade

orientation). Here we will examine whether or not there appears to
be any obvious patterns with regard to revenue enhancement/depletion
following a SAL programme, and initial conditions like tariff levels,
tariff dispersion and QR dependence. Following this, we will focus in
greater detail on the experience of five countries, namely Mauritius, Cote
d'lvoire, Morocco, Jamaica and Kenya. This sub-set includes cases where
both revenue enhancement and revenue depletion actually occurred.
A. Initial Conditions
Table 6 provides a summary of 'initial conditions' which for the most part
draw on characteristics identified in section III as potentially important.

As we can see from Rows (2) and (3) fiscal performance, defined as the
change in the trade tax/GDP ratio following a SAL agreement, does not
appear to vary systematically either with overall dependence on trade
taxes, or with the overall importance of import duties within trade taxes.
Those countries which exhibit an increase in the trade tax/GDP ratio
encompass high, low and medium dependence cases, as is the case with
those experiencing a fall in the trade tax/GDP ratio. In all cases save one
(Ghana), import duties are, overwhelmingly the main source of trade
taxes. Judging from this sample therefore, the general importance of
import duties in trade taxes does not appear to have a significant bearing
on the change in the trade tax/GDP ratio.
In section III it was argued that the probability of revenue enhancement
from liberalisation was greater where pre reform tariffs exceeded maxi-
mum revenue tariffs. We noted there the difficulties of estimating maxi-
mum revenue tariffs. Indeed they are likely to vary from country to
country. Halevi [79&S] categorises tariff structures into high, medium and
low groupings. Other things being equal, the probability of pre-reform
tariffs exceeding maximum revenue tariffs is greater, the higher are initial
tariffs. As we can see from Row (4), all six countries which experienced
revenue enhancement (Mauritius, Chile, Tunisia, Jamaica, Kenya and
the Philippines) had high initial tariff levels. All of the other countries
experienced revenue depletion, and all save one had initial tariff levels in
the medium category. Although this is only a qualitative comparison, it is
none the less interesting. We also argued in section III that a high
dispersion of tariff rates was likely to be associated with a higher proba-
bility of increased revenue yield. The three cases of high dispersion in row
(5) were all instances of revenue enhancement. All the others had medium
dispersion.
We argued earlier that greater pre-reform intensity of QRs was likely to
be associated with a greater potential for revenue enhancement. As can be
seen from row (6) in all countries where revenue enhancement occurred,
with the sole exception of Chile, QRs were either high or medium.
However it is also the case that in those cases where revenue depletion
resulted, QRs were also high or medium! This apparent lack of any
pattern is due to the fact that pervasive QRs are a necessary but not
sufficient condition for revenue enhancement. The sufficiency condition,
TABLE 6
INITIAL PRE-REFORM CONDITIONS IN 11 SAL COUNTRIES
(L = Low; M = Medium; H = High)
Post SAL Chute

in TrvJt T»x/GDP
(•) (•) <•> (-) (-) (-) M W w
Pre-reform Mauri Chile Moroc Jatnai Mexic Fanam Cotec? Ghana Kenya Tunis Phil)
condition*
1. Per capita income* M M M M H H M L L M M
2. Dependence on tride
t u (TT): TT/GR b
H L L - L L M H M M M
3. Import duties/trade
H H H H H H M H H H
4. Tariff leveUd H H M H M H M M H H H
S. Diipcnoa of tariff
nt«d H M M H M M M M M M H
6. Intensity of QR*
• on non-competing
impora" M L M H H M L H H M M
• for protection H L H H H H H H H M M
7. Trade exposuree H M M H L H H L M H M
%. Industrial impons/ r
industrial produclion H na M M L H H na M H t
9. Industrial production/
toul production0 M H M H H L M M M M H
10. Share of traditional

exports in total
exports* M K M M H H H H H M M
II. Special category SSA HIC HIC HIC HIC SSA SSA SSA HIC
a Low income (L) < $420, lower middle income (M) $420-$1810, upper middle income
(H) > $1810.
b L < 15%, M 15-30%, H < 30%.
c L<33%,M33-66%,H>66%.
d Based on Halevi (1988).
e H > 30%, M 15-30%, L < 15% where TO = Vz(X + M)
GDP
f H > 75%, M 50-75%, L < 50%.
g H > 66%, M 33-66%, L < 33%.
h SSA (Sub-Saharan Africa); HIC (Heavily-Indebted Country).
on ceteris paribus assumptions, is that any QRs which are dismantled be

replaced with equivalent tariffs.
In row (7) the tax base is proxied by half of the sum of exports plus
imports over GDP. All revenue enhancing countries have high or medium
trade exposure, so too do three of the revenue depleting countries. Two of
the five recording revenue depletion are also in the low category for trade
exposure. Overall, the average index of trade exposure is 43 per cent in
the revenue enhancing countries, 27 per cent in the revenue depleting
countries. Thus the characteristics tentatively suggest some association
between revenue yield and trade exposure.
In section III we identified the smallness/newness of the industrial
sector, and the share of competing in total imports as relevant variables.

These are difficult concepts to capture in simple summary statistics. Rows
(8) and (9) provide possible indicators of these concepts. There is no
obvious association between the sign on fiscal yield performance, and
either of these indicators. Finally, we argued that the extent of duty
reductions on, and the importance of, traditional exportables in total
exports could have an important bearing on fiscal yield. Row (10) reports
indicators of dependence on traditional exportables, with no obvious
pattern emerging.
These characteristics provide us with some pointers for what may or
may not be important in influencing the susceptibility of fiscal yield to
trade policy reform. The information does suggest that revenue enhance-
ment has tended to occur in economies with relatively wide dispersion of
tariff rates, extensive use of QRs, and relatively high levels of exposure to
trade. Superficially it would also appear to have occurred where there
were relatively high initial tariff rates. But high, scheduled tariffs on
competing imports may not translate into high average rates of duty when
non-competing imports and duty-exemptions are allowed for. Indeed as
we will see in the next section, only some of the countries experiencing
revenue-enhancement reduced tariffs while others actually increased
tariffs overall as a part of the adjustment programme.
B. Trade Policy Reform and Fiscal Yield
In order to identify with greater precision the outcome of what is after all a
highly complicated general equilibrium process, one must have recourse
to more detailed, country specific, analysis. In this section we focus on the
experience of five SAL countries: Mauritius, Cote d'lvoire, Jamaica,
Morocco and Kenya. In three of these countries, revenue enhancement
followed SAL reforms (Mauritius, Kenya and Jamaica); in the other two
cases, revenue depletion resulted. In all of these countries trade policy
reform figures prominently in one or more SAL agreements.
Kenya: Table 7 provides details of basic indicators in Kenya, and Table 8

summarises the trade policy reform measures agreed. Here average tariffs
initially increased between 1980 and 1983. This is largely a consequence of
the fact that most tariffs were effectively redundant due to pervasive
reliance on import bans and QRs. Thus prior to the first SAL in 1980
TABLE 7
BASIC INDICATORS: KENYA 1980-86
a
m
Current Kenyan pounds 1980 1981 1982 1983 1984 1985 1986
GDP 2232.4 2583.5 2998.2 3316.6 3797.5 4290.8 5073.0

I
o
Imports 882 830 802 797 972 1046 1182 8
Exports 468 489 511 617 746 775 949
Import taxes 102.5 134.0 175.8 183.5 165.1 211.8 s

</3
Export taxes 7.0 2.0 6.8 10.1 27.0 39.6 >
a
Total trade taxes 109.5 136.0 182.6 193.6 192.1 251.5
3
Import taxes/ imports 12% 16% 22% 19% 16% 18%
Export taxes/exports 1.5% 0.4% 1.1% 1.4% 3.5% 4.2%
Trade taxes/GDP 4.9% 5.3% 5.5% 5.1% 4.5% 5.0%

O
Imports/GDP 40% 32% 27% 24% 26% 24% 23%
f
Exchange rate (Ksh/SDR) 9.66 10.61 12.05 14.22 14.70 16.68 19.04
a
8
1 period average o
TABLE 8
TRADE POLICY REFORM MEASURES: KENYA
SALs AGREED: 1980, 1982
Policy Instruments Initial Reforms Subsequent Reforms
Import duties - tariffs on some items, - intention to produce

including capital and more moderate and uniform
intermediate goods increased tariff rates, including some
(maximum rate of 100%) use of tariff-equivalents for
removed QRs.
- temporary 10% tariff
surcharge imposed on all
durable items.
Quantitative import - removal of import bans - progressive reduction of

restrictions QRs on most imports
planned
Export taxes/subsidies - rate of export compensation

raised from 10% to 20% and lis
of eligible exports expanded
- no change to export taxes.
Exchange rate policy - depreciation in February 1981 - further depreciations

of 5% and of 15% in Septembei
1981.
Institutional and
other reforms
although scheduled nominal tariff rates ranged from zero to over 100 per
cent, the average collection rate (that is, import duties divided by total
imports), was only 12 per cent. With the relaxation of import bans in 1980-
81, tariffs were raised on some 150 items many of which were inter-
mediates (which accounted for around 11 per cent of total imports). In
addition a ten per cent tariff surcharge was imposed on all dutiable items.
These tariff increases applied to many of the items removed from the ban
list. Note however that there was no systematic attempt to achieve tariff
equivalence. (Indeed the tariff equivalent to an import ban is the pro-
hibitive tariff, yielding zero revenue.) Under SAL II (1982), a progressive
reduction of QRs on all but 12 per cent of imports was proposed, with the
intention of introducing equivalent tariffs in 1984 and 1985. In the process,
tariff harmonisation towards a more moderate and uniform tariff was
planned. Since all of the initial tariff changes in Kenya were directed at
raising the implicit tariff rate, and since this applied to many imports which
were previously untaxed, it is not surprising that the collection rate rose
from 12 per cent to 22 per cent between 1980 and 1983. Over the same
period the ratio of trade taxes to GDP increased (from 4.9 per cent to 5.5
per cent). Moreover, there was a significant decline in the tax base of the
same period as merchandise imports fell by ten per cent. The reason for the
fall in imports is not germane to the present discussion, (although it
appears to be due primarily to a serious foreign exchange shortage -
reserves fell by 50 per cent over the period). What is important to note is
that the fall in M/GDP, alongside an increase in TT/GDP indicates that
revenue enhancement can be unambiguously ascribed to changes in tax
rates. This increase in TT/GDP between 1980 and 1983 occurred despite a
sharp fall in export duties. There is no evidence of changes in export tax

rates. These changes appear, then, to be attributable to changes in the
export base. Thus the value of coffee exports fell from $292 million in 1980
to $241 million in 1983; whilst tea exports fell from $172 million to $153
million over the same period.
Between 1983 and 1985 the collection rate for import taxes fell from 22
per cent to 16 per cent, whilst the rate for export duties increased from 1.1
per cent to 4.2 per cent. The overall TT/GDP ratio fell from 5.5 per cent to
4.5 per cent. Some rationalisation of the tariff regime occurred, but only a
modest reduction of rates resulted. Moreover little progress was made in
liberalising QRs and replacing them with equivalent tariffs. The value of
merchandise imports increased by some 30 per cent over this period. As
can be seen from Table 7, some exchange rate depreciation took place.
However, the principal driving force here appears to be a relaxation of
foreign exchange constraints. Foreign exchange reserves increased from
$281 million to $448 million between 1982 and 1984 and, also in 1984 there
was a significant increase in external loans of almost $500 million. Thus,
despite an expanding (import and export) tax base the TT/GDP ratio fell.
This appears to be attributable to a fall in collection rates on imports.
Finally, it might be noted that between 1985 and 1986, both the tariff
collection rate, and the ratio of TT/GDP increased. As there were no
significant tariff rate changes, or quota changes in that year, this appears
to be attributable to a 12 per cent increase in the tax base. In turn, the
increase in the tax base seems to be due to a sharp increase in export
earnings, in particular from coffee exports, (up from $281 million to $479
million), relaxing the foreign exchange constraint. Provisional estimates
indicate that this has continued into 1987, with the collection rate, TT/
GDP ratio, and import base all increasing again.
The only other (less relevant) factor which may be briefly mentioned in
the Kenyan case is changes in the composition of the tax base. Between
1980 and 1983 this appears to be irrelevant. Between 1983 and 1987 two
significant changes occurred. In imports, fuels and lubricants became less
important at the expense of transport equipment. It is not clear whether
these changes are directly due to the trade policy measures. Nor is the
impact of this on fiscal yield. Assuming, however, that fuels and lubricants
are subject to excise duties whilst transportation equipment is subject to
import duties, this should have been revenue enhancing. With regard to
exports, the relative importance of coffee increased. This too should have
been revenue enhancing. This was the main factor behind the strong
growth in exports recorded in Table 7. It does not, however, appear to
have had much to do with the trade policy measures. Indeed, the share of
non traditional exports actually fell marginally between 1980 and 1986.
Mauritius: Table 9 provides information on basic indicators for Mauritius,

whilst Table 10 provides details of the SAL reform measures. Mauritius
also experienced revenue enhancement following SAL lending pro-
grammes. There are some similarities with the Kenyan case, but also some
important differences. The SAL reforms altered both import and export
duties. In the case of the latter these took the form of changes in exemption
and assessment arrangements. A major change was the increase in the

limits for exemption from export taxes in the sugar sector. The ceiling was
raised from 75 tons to 1,000 tons. Since small planters account for around
40 per cent of annual output, the combination of this and a reduction of
effective rates for larger producers is estimated to have reduced revenue
by about 22 per cent of 1983-84 export duties. With regard to non-
traditional exports, duty drawbacks were offered. Clearly both of these
provisions were unambiguously revenue depleting.
On the import side, both duty rates and the tax base were altered.
Proposals were made for reductions in the highest rates as well as a
consolidation and simplification of pre-reform duties (of which there were
no less than five different types). The single most important SAL-induced
based change was the revised arrangements for exemptions. Duty exemp-
tions for DC (Development Certificate) companies (that is, import
substitute companies) were withdrawn, whilst exemptions for export
oriented firms were extended. Since the share of output of DC firms was
greater than that of export oriented firms, the initial impact of this change
is likely to have been revenue enhancing. As a consequence of these
changes, the collection rate of import duties increased from 14 per cent in
1981 to 22 per cent in 1983.
An important change initiated by SAL II in 1983 was the withdrawal of
QRs. These were pervasive prior to that date. Few 'made to measure'
tariffs have replaced them as yet. However, some quota rents were
captured by the introduction of import surcharges in 1985. Although these
have not been calibrated as equivalent tariffs, they have redistributed
some quota rents to government and this reform has probably been
revenue enhancing.
To a greater extent than any other country in the sample, Mauritius
introduced an extensive package of export incentives, in particular for
non traditional exports. As well as improvements in the existing duty
drawback scheme, improved corporate tax exemptions to exporters were
offered. In addition several significant institutional improvements were
introduced including an export credit guarantee and insurance scheme; a
central source of information and market intelligence (MEDIA); an
Industrial Coordination Unit to assit potential foreign investors, and the
conclusion of double taxation agreements with France, West Germany
00
TABLE 9
BASIC INDICATORS: MAURITIUS 1980-86
O
Rs million 1980 1981 1982 1983 1984 1985 1986 w
iLOPIN
GDP 7.39 8.76 10.02 10.65 11.85 16.61 19.74
Imports (of goods) 3.97 4.26 4.31 4.50 5.47 8.12 9.19
a
o
Exports (of goods) 3.34 2.99 3.99 4.35 5.04 6.73 9.06 c
Import taxes 0.70 0.69 0.98 1.15 1.33 1.36 1.72
CO
Export taxes 0.27 0.38 0.42 0.44 0.45 0.36 0.45
>
SID THE 1
Total trade, taxes 0.97 1.06 1.41 1.59 1.77 1.74 2.19
Import taxes/imports 17.6% 16.2% 22.7% 25.5% 24.3% 16.7% 18.7%

2
Export taxes/exports 8.1% 12.7% 10.5% 10.1% 8.9% 5.3% 5.0%
Trade taxes/GDP 13.1% 12.1% 14.1% 14.9% 14.9% 10.5% 11.2% 2
Imports/GDP 53.7% 48.6% 42.9% 42.2% 46.2% 48.8% 46.8%

C
Exchange rate (R/$) 7.7 8.9 10.9 11.7 13.8 15.4 18.5
r
1 period average o
I
TABLE 10
MAURITIUS: SUMMARY OF REFORMS
SALs AGREED: 1981, 1983
Import duties - consolidation of some duties - intention to reduce spread

- lowering of average tariff of tariffs
levels - intention to consolidate
- reduced exemptions to duty fiscal, customs and stamp
- import surcharge in 1984-5 duty into one tax
Quantitative import - QRs lifted in Jan. 1985 - intention to introduce

restriction tariff equivalents
Export taxes/subsidies - increased exemptions to

export tax
- extension of duty drawback
to exporting firms
Exchange rate policy - depreciation of 45% against

S between 1981 and 1985
Institutional and - creation of MEDIA

other reforms - creation of ICU
- introduction of ECGI scheme
- negotiation of double taxatioi
agreements
External shocks - no significant exogenous

shocks
and the UK for tax holiday provisions. These, together with the increasing
attractiveness of Mauritius as a location for offshore investment con-
tributed to the subsequent export-led growth of the economy. As a
consequence the tax base (imports and exports) grew strongly after 1982,
as can be seen from Table 9.
Two other important factors in the Mauritian case are exchange rate
changes, and other tax changes. The exchange rate was permitted to
depreciate over the adjustment period. Moreover this was a real deprecia-
tion (with the exchange rate falling by 27 per cent whilst the consumer
price index rose by 17 per cent). Second, at the same time as trade reforms
were being initiated, a number of new taxes were introduced, for instance
a land development tax, a tax on seasonal residences, a land transfer tax
and a withholding tax on dividends. The significance of these instruments
was that they helped alleviate the fear of potential revenue depletion
from the trade reforms. The reassurance provided by these instruments
increased the government's resolve to see the reforms through.
TABLE 11
BASIC INDICATORS: MOROCCO 1980-85
o
Current million DH 1980 1981 1982 1983 1984 1985 1986 tn
5
GDP 70161 76737 90088 94635 104807 119658
Imports 16793 22455 25990 25591 34396 38675

1
n
o
Exports 9645 11807 12440 14924 19110 21740
z
Import taxes' 3315 3951 4697 4229 4418 4466
m
Export taxes 214 257 246 223 296 333
Total trade taxes 3530 4208 4943 4452 4714 4799 O
Import taxes/imports 21% 18% 18% 17% 13% 12% M

I—I
Export taxes/exports 2.2% 2.2% 2.0% 1.5% 1.5% 1%

W
Trade taxes/GDP 5.0% 5.5% 5.5% 4.7% 4.5% 4.0%
Imports/GDP 23.9% 29.3% 28.8% 27.0% 32.8% 32.3%

o
2
Exchange rate (DH/USS) 3.93 5.17 6.02 7.11 8.81 10.06 >
w
o
1 including customs duties and special tax imports, but excluding sales tax on imports.
o
2 period average o
2
TABLE 12
TRADE POLICY REFORM MEASURES: MOROCCO
Policy iDStruments Initial Reforms Subsequent Reforms
Import duties - reductions in tariffs - further reduction of

(to a maximum rate of 45%) maximum tariff rate
- reduction in Special planned
import tax from 15% to 5% - elmination of duty
exemptions planned, other
than temporary import
admissions for exports
Quantitative import - removal of import bans - replacement of pervasive

restrictions - reduction of licensing QRs by tariffs planned
requirements to c.15% of
imports
Export taxes/subsidies - intended removal of

statistical tax on exports
Exchange rate policy - devaluation of about 18% - further depreciation of

currency
Institutional and - fiscal reform which -simplification of trade

other reforms introduced a value-added procedures planned
tax and improved revenue - further reform of excise
collection of existing taxation envisaged
taxes
The revenue effects of these changes can be seen by reference to Table

9. Between 1981 and 1984 total trade taxes increased by 67 per cent in
nominal terms, and by 23 per cent relative to GDP. Revenue from both
export taxes and import taxes increased in absolute terms. However,
despite strong export growth the collection rate on exports fell by over 40
per cent. This can be attributed to the change in exemption arrangements
and rates on export taxes for sugar. By contrast the collection rate for
imports increased by 50 per cent. This resulted from a combination of both
rate changes and base changes. The former were relatively modest,
and in general, in an upward direction. The import surcharges which
accompanied removal of QRs meant that they were probably revenue
enhancing. With regard to base changes, the growth in imports, together
with a significant reduction in exemptions would have been revenue
enhancing.
All of the foregoing remarks pertain to the years adjacent to the two
SALs. When we look further to 1985 and 1986, the picture changes again.
Both import and export growth are strong, especially the former. Import
duty collections continue to rise in nominal terms, increasing between

1984 and 1986 by 29 per cent. However, imports grew by 68 per cent over
the same period. Since the collection rate fell back from 24 per cent to just
under 19 per cent this implies one of two things: first increased imports of
exempt and duty free items; second further falls in nominal rates as further
liberalisation became effective. At this stage, it is too early to be more
precise on causality.
Morocco: Table 11 provides details on basic indicators for Morocco

whilst Table 12 summarises the reform measures. As can be seen from
Table 6 the 'initial conditions' were quite different to those in either Kenya
or Mauritius, with average tariff levels defined as medium dispersion of

tariffs, medium quota protection, and a low dependence on trade taxes.
Here two loans with substantial trade policy elements were introduced in
1984 and 1985. The reforms initiated were predominantly with regard to
import duties. A 'statistical' tax on exports was removed. This was,
however, of trivial importance. The maximum rate of customs duty was
lowered to 45 per cent, and the special import tax lowered from 15 per cent
to 5 per cent. In addition a wide range of exemptions were eliminated.
As the reforms were implemented, the collection rates for customs
duties, total import duties and export duties declined between 1982 and
1985, from 6.6 per cent to 5.6 per cent; 18 per cent to 12 per cent and 2 per
cent to 1.3 per cent respectively. Over the same period, however, the tax
base appeared to expand, with import value increasing by 50 per cent, and
export value increasing by 75 per cent. As can be seen from Table 11, the
most significant changes occur between 1983 and 1985. Since the pro-
portionate fall in collection rates is less than the proportionate increase in
the tax base, revenue collections of both import and export taxes increase
between 1983 and 1985 in absolute terms. Nevertheless, the share of trade
taxes in GDP fell from 5.5 per cent to 4.0 per cent. Can one legitimately
infer from this anything about the potential impact of trade reform
measures? Ceteris paribus, the increase in tax base should have been
revenue enhancing. Moreover, the reduction in exemptions should have
been revenue enhancing. Ceteris paribus the changes in nominal import
and export tax rates could be revenue enhancing or revenue depleting
depending upon whether the pre-reform average tariff exceeds or falls
short of the maximum revenue tariff. Since actual collection rates fell, and
the share of trade taxes in GDP fell, this provides strong presumptive
evidence to the effect that average initial tariffs were below the maximum
tariff rate. This presumption is further supported when one considers
other elements of the reform package. In particular import bans were
removed from the outset and there was a reduction in import licensing
requirements. The majority of QRs extant for protective purposes were
retained. Those bans and QRs which were eliminated were not replaced
with tariff equivalents. The only other points which might be noted are
that the exchange rate was permitted to depreciate with the import
liberalisation. Beyond this, however, there were no specific export pro-
motion measures introduced. The strong growth in imports alongside this
exchange rate depreciation suggests that the trade policy measures had a
role to play. The growth in exports was even stronger, with the current
balance steadily improving after 1982.
Since there were no significant exogenous factors affecting Morocco
over this period, the facts of this particular case seem reasonably clear. All
of the trade policy measures were in the direction of liberalisation.
Average tariffs were lowered, and exemptions reduced. Many import
bans were eliminated, but no offsetting tariffs were imposed on pre-
reform quota restrained imports. Both imports and exports expanded
over the reform period. In absolute terms, revenue collections increased.
However recorded collection rates fell. Since the tax base expanded more
than in proportion to the collection rate and exemptions were reduced the
overall revenue depletion can be attributed to a small change in the
composition of imports (away from machinery and equipment, towards
raw materials and semi finished products which attract more exemptions),
and the strong likelihood that the initial average nominal tariff was below
the maximum revenue tariff.
Jamaica: Jamaica is another small open economy where many of the

initial conditions appeared to be conducive to potential revenue enhance-
ment. SALs here were agreed in 1982,1983 and 1984. Most policy reforms
related to imports and influenced both tax rates and the tax base. Initially
there were no changes in 'visible' tariff rates, that is, customs duty.
However, the scope of secondary import taxes in the form of stamp duty
and import surcharges was expanded, and their rates increased. As a
result, the overall rate of import duty actually increased. In addition,
exemptions to import duty were reduced. As in many LDCs these were
pervasive prior to reform. As well as tariff revisions, there were sub-
stantial revisions in QRs. Prior to SAL I in 1982, all imports were subject
to licensing provisions and there were 364 specific QRs. The SALs
required the removal of licensing for all but a few state-owned companies.
In addition many QRs were eliminated and by 1988, non tariff barriers
only affected around 8.5 per cent of total imports. No formal provisions
were made for replacing the QRs with equivalent tariffs. De facto,
however, some replacement occurred through the increased rates for, and
expanded scope of, stamp duty and import surcharges. Table 13 shows
average rates of collection on imports to be very low prior to the SAL I in
1982; 3.5 per cent and 6.1 per cent in 1980 and 1981. From such low,
average operative levels, tariff-rate increases implicit in stamp duty rises
and surcharges must be viewed as potentially revenue-enhancing.
Pressures for exchange rate adjustment were initially resisted. In 1983,
however, a parallel market was sanctioned, subsequently unified with the
official market, and between 1983 and 1985, the Jamaican dollar fell from
$1.78 = US$1, to $6.40 = US$1. Some changes in the structure of imports
occurred which were consistent with the reduction in exchange rate over-
valuation, and the removal of QRs. For instance, the share of consumer
goods in total imports doubled from 11 per cent to 21 per cent. Of course a
300 per cent plus currency depreciation had a major impact on the total tax
to
TABLE 13 t
BASIC INDICATORS: JAMAICA 1980-86
US$ millions 1984 O

1980 1981 1982 1983 1985 1986 W
'ELOPI
GDP 4750.1 5267.2 5841.9 6897.0 9381.0 11263.1 13328.1
Imports 1201.6 1488.1 1391.6 1244.0 1221.4 1034.1 1031.6 O
Exports 1009.5 888.9 734.1 721.8 673.3 540.7 609.7

8
Import taxes 42.5 91.0 159.2 175.0 277.2 497.6 601.3 H
IES/
Export taxes - - - - - - -
Total trade taxes* 47.5 94.8 169.4 186.2 294.9 529.4 639.7
a
THE INI
Import taxes/imports 3.5% 6.1% 11.4% 14.1% 22.7% 48.1% 58.3%
Export taxes/exports
Trade taxes/GDP 1.0% 1.8% 2.9% 2.7% 3.0% 4.7% 4.8% ?3
tATK
Imports/GDP 25% 28% 24% 18% 13% 9% 8%
<_>
Exchange rate 1.78 1.78 1.78 1.93 3.94 5.55 5.47
(Jam $/US$) r
w
:ONOMY
1 Estimated for 1982-86 as average 1980-81 share of import taxes in total trade taxes.
2 This excludes the bauxite levy.
3 Total taxes on international trade and transactions.
TABLE 14
JAMAICA: SUMMARY OF REFORMS
SALs AGREED: 1982, 1983, 1984
Import duties - no changes in customs - reductions of very high

duty rates combined duties not started
- rates of other import until 1987 as part of
specific duties (stamp comprehensive tariff reform
duty and import surcharges programme
increased and coverage of - pervasive duty exemptions
taxes increased gradually phased out
Quantitative import - import licence requirements - most QRs eliminated

restriction eliminated, other than for by 1988
state-owned trading company
and few specific items
- gradual elimination of
specific QRs
Export taxes/subsidies -
Exchange rate policy - at very outset no - series of devaluations

adjustment, and reduction between Jan. 1983 and Oct.
of real effective exchange 1985 resulted in real
rate of 3.8% in 1982 effective depreciation of
5.6% in 1983, 30.1% in 1984
and 12.6% in 1985
Institutional and - improved impon tax - developing a revised

other reforms administration at ports of indirect value-added tax
entry system
- some reform of personal
income tax system
External shocks - no significant exogenous

shocks
base as well as on the composition of the base. The volume (and foreign
currency value) of imports fell sharply after 1982, but in local currency
terms the value of imports was sustained by currency depreciation.
Exchange rate changes also affected (non-trade tax) revenues associated
with specific exports. Bauxite levy receipts, for example, rose sharply in
1984 as devaluation induced a rise in export earnings from bauxite. But the
trend decline in production meant that bauxite levy/GDP ratio did not
increase over the period as a whole. Other trade-related policy changes
may also have affected (non-trade) revenue yields. First, the role of state
marketing boards was reduced in bananas, coffee, cocoa, citrus and
pimento. Second, a duty drawback scheme was introduced, although this

has not proved to be very effective. The combined impact of these changes
was not likely to have been significantly revenue-depleting. Indeed over
the period as a whole tax effort increased; from 26.9 per cent of GDP in
1982 to 30.4 per cent in 1986.
The collection rate for trade taxes rose dramatically from under 12 per
cent in 1982 to nearly 60 per cent in 1986. This extraordinary increase
occurred against the backcloth of a decline in the volume of imports,
which contracted by a third over the same period. This source of decline
in the tax base was (approximately) offset in absolute terms by the
substantial devaluation that occurred after 1983. But in relative terms the
import tax base fell sharply; the import/GDP ratio falling from 24 per cent
in 1982 to 8 per cent in 1986. Notwithstanding this the rate of import tax
collection still rose sufficiently for the TT/GDP ratio to rise significantly;
from 2.7 per cent in 1983 to 4.8 per cent in 1986. In view of the relative
contraction of the import base, it would seem that the change in fiscal yield
was primarily due to an increase in operative tariff rates. This increase
was from two sources. On the one hand improved tax administration at ports
of entry substantially reduced exemption from import duties. On the
other hand there were additional import-specific taxes introduced in 1982
as Jamaica shifted from quantitative to tariff restrictions. Thus, although
no formal provisions were made to introduce equivalent tariffs, the tariff
surcharges acted as surrogate tariff equivalents.
Cote d'lvoire: Of all of the countries considered in this section, the

reforms proposed in the Cote d'lvoire were the most far reaching and
ambitious. These are summarised in Table 16, whilst basic indicators are
reported in Table 15. SALs and Stabilization Loans were negotiated in
1981, 1983 and 1986. The 1981 Stabilization Programme made provisions
for increases in producer prices in agriculture; initiated restructuring in
parastatals; and made provisions for increases in non-trade taxes. Trade
policy reforms were initiated under the terms of the 1983 SAL. The
structural adjustment programme initiated included comprehensive
trade policy reforms. These applied to both imports and exports and were
due to be phased in over the period 1985-90. It was proposed that nominal
tariff rates be lowered, and their dispersion narrowed, with a view to
creating a uniform effective tariff of 40 per cent across all activities. In
addition, it was proposed that appropriate export subsidies be granted, in
order to ensure that exporters similarly benefited from an effective
protection rate of 40 per cent. Since effective protection rates in 1980
ranged from 14 per cent to 355 per cent, this represented a significant
degree of liberalisation for many industries. Moreover, some activities
also benefited from QRs - prior to the SAL reforms about 45 per cent of all
imports were subject to quotas. These began to be dismantled in 1985 and
complete quota liberalisation was scheduled for the end of 1986. To ease
adjustment problems temporary import surtaxes of 10 per cent to 50 per
cent were proposed and were to be phased out, on a linear basis, over a
five-year period, between 1986 and 1990. In line with the overriding
3
in
TABLE 15
n
BASIC INDICATORS: COTE D'lVOIRE 1980-86

o
pi
PENIDENCE
CFAF Billion 1980 1981 1982 1983 1984 1985 1986
GDP 2222 2323 2493 2653 2869 3138 3244
Imports 552 560 607 574 778 773 709 §

Exports
Import taxes
637
163
743
187
806
187
797
180
1218
175
1318
219
1160
229
io
pi
H
Export taxes 53 59 55 51 72 79 77
Total trade taxes 216 246 242 231 247 298 306 V
Import taxes/imports 29.5% 33.4% 30.8% 31.3% 22.5% 28.3% 32.3% O

Export taxes/exports 8.3% 7.9% 6.8% 6.4% 5.9% 6.0% 6.6%
O
Trade taxes/GDP 9.7% 10.6% 9.7% 8.7% 8.6% 9.5% 9.4% PI
Imports/GDP 24.8% 24.1% 24.4% 21.6% 27.1% 24.6% 21.9% o

Exchange rate (CFA/S) 211.3 271.1 320.6 381.1 436.9 449.3 346.3
TABLE 16
COTE D'lVOIRE: SUMMARY OF REFORMS
SALs AGREED: 1981, 1983, 1986
Import duties - reduction in nominal tariffs

to achieve uniform effective
tariffs
- reduction in some exemption
Quantitative import - planned abolition of QRs

restriction and replacement with
temporary surcharges
Export taxes/subsidies - provision of export

subsidies
- increase in producer prices
in agricultural sector
Exchange rate policy
Institutional and - new Investment Code - planned privatisation

other reforms
External shocks
objective of wholesale rationalisation and simplification of the tariff

structure, tariff exemptions on imports of intermediates for priority firms
were eliminated. Significantly, however, an exception was made for
domestic producers of intermediates.
In this reform package then, both tax rates, and the tax base were
altered. Nominal tariffs which were significantly higher than effective
tariffs, prior to reform, were reduced by less than effective tariffs.
Although there were attempts to reduce disprotection to exporters, it is
notable that in the initial reform period the exchange rate which had
remained stable between 1982 and 1984 actually appreciated between
1985 and 1986. Both the import and export tax base contracted until
1983, then expanded in 1984 and 1985 (as cocoa prices rose). However
collection rates of import duties, which had risen between 1980 and 1983,
fell in 1984 and 1985, from 28 per cent in 1983 to just over 20 per cent in
1985. Collection rates of export duties which had been stable between
1980 and 1983 rose fractionally in 1984-85, but only by one per cent. In the
1982-86 period as a whole the TT/GDP ratio fell by two percentage points.
Why was revenue depletion associated with the Ivorian reforms?
Several factors appear to have been at work. First, pre-reform average

nominal tariffs were relatively low. Specifically, across 19 industrial
sectors they ranged from 15 per cent to 49 per cent. Even at the higher
end of this range, these are probably below maximum revenue tariffs.
Although the degree of tariff liberalisation was limited, that which
occurred was probably revenue depleting. Second, there was provision
for an elimination of QRs, and their replacement with import surcharges.
The latter could have been revenue enhancing had they been introduced
on any significant scale. The fact is, however, that QR liberalisation was
limited, and the import surcharge requirement was never fully imple-
mented before the entire programme was abandoned. Revenue depletion
no doubt contributed to the lack of commitment to, and ultimate
breakdown of, this programme. So too did other components of the

package. The initial disbursements required for export subsidies intensi-
fied budgetary pressures, and the absence of any new fiscal instruments
failed to provide any fiscal respite in the adjustment period. Finally, the
sheer complexity of the reform package has to be acknowledged. To
require the administration to set and maintain target rates of effec-
tive protection and administer temporally degressive surcharges and
administer a new export subsidy requirement was simply to ask too much.
V. SOME LESSONS TO BE LEARNED

The SAL programme is an important one. SALs and SECALs (sector
specific SALs) together account for around 25 per cent of the World
Bank's annual lending activities. In absolute terms this makes it a vitally
important source of finance to developing countries - SAL and SECAL
disbursements are now equivalent to around 20 per cent of all overseas
development assistance to the non-oil developing countries. Arguably,
however, these figures if anything, understate the importance of the
programme for two reasons. First, the degree of flexibility associated with
the use of SAL funds makes them a particularly useful instrument from the
recipient's standpoint. Second, the conditionality associated with their
use means that this is a form of high profile, 'political track' lending, in
contrast to lower profile, 'administrative track' project lending. One can
expect SAL lending to increase rather than diminish in importance in the
medium term. That being so it is a vitally important to learn from the
experience thus far. The fiscal implications of SALs have a crucial bearing
on the success or otherwise of entire SAL programmes. Success depends
crucially on government commitment. This in turn is a function (among
other things) of budgetary constraints. If SALs turn out to be revenue
depleting, or are assumed in advance to be revenue depleting, the
probability of the SAL programme being carried through is lower than it
would otherwise be.
In this study we have focused specifically on fiscal implications of SALs,
both from an a priori standpoint, and by reference to the actual experience
of a number of countries. Although definitive conclusions require much
more detailed case study appraisal, our analysis provides a number of
important clues to the factors which can influence and have influenced
fiscal yield. Specifically the following conclusions can be adduced:
1. It is inappropriate and misleading to claim either that trade liberalisa-
tion will always be revenue enhancing, or that it will always be
revenue depleting. Both a priori theorising, and our country analyses
demonstrate that a range of outcomes is possible depending upon
initial conditions, and the precise components of any reform package.
2. A priori theorising suggests that tariff rate changes can have an
important fiscal impact, the direction of change depending upon
whether rates are initially above or below revenue maximising tariff
rates. Our detailed country studies uncovered a range of outcomes.
Revenue enhancement appears to have been associated with tariff

reductions in Mauritius, but tariff increases in Kenya and Jamaica.
Revenue depletion on the other hand appears to have been associated
with tariff reductions in both Morocco and to a lesser extent Cote
d'lvoire. Initial tariff levels were such in these last two countries, as to
strongly suggest that the revenue depletion was attributable to tariffs
being reduced from pre-reform levels which were below maximum
revenue tariffs. This is particularly so in the case of Morocco where the
primary instrument of reform was a change in tariff rates.
3. Most SALs involve QR changes. Few of the cases considered involved
the replacement of QRs with an explicit, carefully calibrated tariff
equivalent. Crucially however, in all of the revenue enhancing cases
some kind of temporary tariff surcharge was introduced. De facto this
acted as a surrogate tariff equivalent, and resulted in revenue augmenta-
tion. In the revenue depleting cases no such taxes were introduced.
4. Reform induced changes in tax base also appear to be important. In all
of the revenue enhancing cases significant changes in exemption
arrangements were part of the reform package. This was also true of
the revenue depleting countries. In all cases the reduction in exemp-
tions would have been revenue enhancing; in some cases it reinforced
other changes, in other cases counteracted them.
5. The importance of changes in the import/export base varies from one
case to another and appears to have been most significant in Mauritius.
6. There were two cases where a comprehensive range of export incen-
tives were planned, Mauritius and the Cote d'lvoire. In the Mauritian
case they were implemented, in the Ivorian case they were not. It is no
doubt true that external conditions were more conducive to export
expansion in Mauritius. However, three policy reform elements stand
out as being relevant in explaining the contrasting developments in the
two economies. First, the Mauritian reforms were simpler and geared
more to institutional support than the Ivorian reforms. Administra-
tively they were easier to introduce than the much more complex
Ivorian reforms. Second, short run fiscal respite was provided in
Mauritius by the introduction of other non-trade taxes which were
contemporaneous with the trade reforms. Third, the exchange rate
was allowed to depreciate in Mauritius, it was not in the Cote d'lvoire.
Clearly further, more detailed, country specific research and further

CGE analysis is required in order to probe these issues for a larger number
of countries. However, even the above conclusions have implications for
the timing and sequencing of trade policy reforms in SALs. In evaluating
fiscal yield, close attention needs to be paid to initial tariff rates, and in
particular collection rates, by way of assessing the potential for revenue
depletion/enhancement prior to reform. Second, it is also clear that in the
early stages of a reform programme, a valuable source of fiscal enhance-
ment is reduced tariff exemptions. Third, where QRs are eliminated,
careful consideration should be given to their replacement with some
form of tariff surcharge. If this is regarded as inappropriate for allocative
reasons, then fiscal respite should be provided by the introduction of some
other non-trade taxes. This would be likely to increase government

commitment to see the reform package through, by reducing anxiety
about budget constraints.
NOTES
1. Long-term fiscal impact is likely to be less problematic, since with full supply responses
to reform fiscal-depletion is less likely. Endogenous change and policy reforms are also
likely to reduce dependence on trade taxes.
2. In order to simplify the analysis it is assumed that effective protection is directly related
to nominal tariffs. Strictly speaking, effective protection is directly related to nominal
tariffs on competing final imports and inversely to nominal input tariffs. But where
tariffs are used for protective purposes, there is invariably substantial tariff escalation
(often as a result of duty exemptions on intermediate imports). Tariff liberalisation is
likely to be directed, therefore, at tariffs on competing final imports.
3. For instance according to official estimates, the revenue foregone via exemptions in
Tanzania in 1986 was almost equivalent to total revenue collected. Where a trade policy
reform programme leads to a restriction of the incidence of exemptions then clearly
revenue collections will be enhanced.
4. Of course many imports subject to QRs in developing countries are also subject to
tariffs. But the removal of QRs will still be revenue-enhancing if, as is likely, the QR is
more binding than the tariff.
5. For example, a recent study estimated that replacement of quotas with equivalent tariffs
in Burundi for a sample of products that constituted only about 15 per cent of total
imports would have transferred rents (in 1984) to government revenues approximately
equivalent to total import tax revenues in that same year [Greenaway and Milner, 1988].
6. Indeed multiple exchange rates are employed in some countries as a means of 'taxing'
traditional exports that are relatively inelastic in supply. Foreign exchange earnings
from these traditional exports have to be converted into domestic currency at a highly
over-valued rate, while the authorities are able to sell foreign exchange to other sectors
or agents at rates at or nearer the true of equilibrium rate. As the equilibrium rate
depreciates further from the official rate for the 'taxed' exports, then the 'export tax'
yield is increased. This type of multiple exchange rate system may be explicitly used, or
implicitly operated through the pricing policies of state marketing boards.
7. It should be noted that this relationship across country groups has been challenged
by Hitiris and Weekes [1987]. They accept that a negative relationship between
dependence on trade taxes and development exists but argue that the relationship is only
characterised by a single break. As Greenaway and Sapsford [1987] demonstrate
however, both on a priori theorising and appropriate estimation techniques, there are
likely to be three distinct sub-groups - the least developed, middle income, and
industrialised countries.
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Fiscal dependence on trade

To link to this article: http://dx.doi.org/10.1080/00220389108422205

PLEASE SCROLL DOWN FOR ARTICLE

by David Greenaway and Chris Milner*

The article focuses on fiscal implications of Structural Adjustment

cases experienced revenue depletion. The central point which

* University of Nottingham and Loughborough University respectively. The authors wish to

The Journal of Development Studies, Vol. 27, No. 3, pp.95-132.

trade liberalisation will unambiguously lead to fiscal enhancement or

II. THE ANALYTICAL LINKS BETWEEN TRADE POLICY REFORM AND

should in itself be revenue-neutral. However the extent that greater

The provision of export incentives such as duty drawback, concessional

Country TTa/GR(%) •3NPb MT d /rr(%)

Gambia 62.56C 378 n.a.

Chad 52.43d 125 86

Country TTa/GR(%) ONP'

Mexico 19.34 2016 M

Syiia 14.43 1419 9S

Country TT a /GRW CNPb MTd/TT(%)

World 4.9B 2481 84

Industrial countries 1.61 10201 97

Non-oil developing countries 16.96 393 78

a Trade taxes as a percentage of total government revenue - average of seven-year period

is most likely therefore to be revenue-enhancing in the case of countries

III. FACTORS THAT DETERMINE THE REVENUE IMPACT OF REFORM

income countries in Sub-Saharan Africa.

(») Cross Classification bv Income per Capita

Low Income (39) 33.8 40.7 14.0 75.0 21.0

Lower Middle Income (34) 22.6 20.2 16.0 74.0 44.0

Cbl Cross Classification bv Dependence on Trade Taxes

Low Dependence (25) 7.2 14.5 17.8 65.5 61.0 3,560

(ct Cross Classification bv Continent

Africa (4) 35.8 32.3 15.6 82.4 29.9 637

(d) Cross Classification bv Degree of Trade Exposure <TE)

Low TE (22) 28.4 34.0 13.0 72.8 33.6 782

whilst the'proportion of the total population in urban areas varies directly.

which these characteristics describe most clearly is the Sub-Saharan

Country groupa (number) Taxes O

A: Industrial countries (20) 33.3

B: Semi-industrial countries (15) 25.3

C: Middle-income countries (55) 23.7

F«riod Eq. No.* Equation

2 log REV - 0.945 - 0.907 log CNP + 0.575 log TR R2 - 0.63

3 log REV - 0.707 • 0.497 log CNF + 1.13 log TR R 2 - 0.72

(0.81) (3.89)# (2.04) N - 23

2 log REV - 3.037 • 0.295 log CNP + 0.452 log TR R 2 - 0.24

3 log REV - C.421 • 0.852 log CNP + 0.518 log TR R 2 - 0.55

2 log REV - 1.541 • 0.263 log CNF + 3.280 log TR R 2 - 0.14

3 log REV - 3.720 - 0.119 log CNF + 6.797 log TR R 2 - 0.40

3 log REV - 6.77 - 0.64 log CNP + 0.21 log TR R 2 - 0.35

Tariff and Non-Tariff Reform, and Import Duty

countries is often the outcome of ad hoc crisis management and lobbying

of imports can be expected to alter as a result of other trade policy reforms.

Export Incentives, Exchange Rate Policy and Revenue

viously (non-traditional) exports on which there was no duty drawback

IV. STRUCTURAL ADJUSTMENT LENDING AND FISCAL YIELD IN A

Possibility of revenue-depletion Possibility of revenue-enhancement

- of import duties, inversely related to - of import duties, directly related to

- of import duties, directly related to - of import duties, directly related to

- of import duties, directly related to - of import duties, directly related to

- of import duties, inversely related to - of import duties, directly related to

of economic characteristics (debt position, income per capita and trade